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Thursday, June 25, 2009

This is an issue that anyone who is prosecuting class actions should be aware of. In Rodriguez v. West Publishing Corporation (full text here) the Ninth Circuit held that "incentive agreements" between class representatives and class counsel, which class counsel did not disclose at the certification stage, created an unacceptable conflict of interest between the class representatives and class counsel, on the one hand, and the members of the class, on the other. What is an "incentive agreement," you ask? The Court described it as follows:

Class counsel filed a motion seeking incentive awards for the class representatives after preliminary approval of the settlement and dissemination of the Settlement Notice, but before the final fairness hearing. It turns out that, as part of their retainer agreement, the named plaintiffs ... had entered into an incentive arrangement with [class counsel]. The incentive agreements obligated class counsel to seek payment for each of these five in an amount that slid with the end settlement or verdict amount: if the amount were greater than or equal to $500,000, class counsel would seek a $10,000 award for each of them; if it were $1.5 million or more, counsel would seek a $25,000 award; if it were $5 million or more, counsel would seek $50,000; and if it were $10 million or more, counsel would seek $75,000.

It seems pretty obvious that such an agreement is a bad idea for everyone involved, even if the Court did call it harmless error.